CPD: Business culture and ethics

It’s important to have a strong business culture to ensure advice practices meet their ethical obligations.

A strong business culture is one of the identified attributes of ethical businesses. This article, proudly sponsored by GSFM, investigates the interrelationships between business culture and ethics.

The symbiotic relationship between ethics and business culture is a defining force. It shapes the contours of organisational identity and steers the course of corporate conduct. The values, norms and behaviours entrenched within a company’s culture are what binds it and its people together.

In today’s hyperconnected and increasingly regulated and scrutinised landscape, the spotlight on ethical conduct within advice practices burns bright. Stakeholders, regulators and clients demand accountability, transparency and a steadfast commitment to principled action. Within this, the role of business culture is both catalyst and crucible, where ideals collide with the reality of business.

There are myriad ways in which organisational culture serves as the incubator for ethical norms. This is particularly evident in financial advice practices where clients entrust their financial security and aspirations to the guidance of professionals. In recent years, the spotlight has intensified on the ethical underpinnings of financial advice, underscoring the profound impact that business culture exerts on client outcomes and industry reputation.

Ethics and business culture – a global perspective

Ethics and business culture have hit the local media, with economic commentator Ross Gittens pondering Australia’s lack of productivity and quoting Dr Simon Longstaff from the Ethics Centre who suggested that ‘behaving more ethically would be a good way to get better results from the economy.’^[1] In fact he posits, there is a strong business case for behaving ethically (one backed by Deloitte Access Economics in a report for the Ethics Centre) because business relies on a high degree of trust. Further, research by Access Economics found evidence that unethical behaviour leads to poorer financial outcomes for business.

The findings from ECI’s Global Business Ethics Survey therefore make for grim reading. The most recent survey (from 2023) found that businesses face higher risk for misconduct and loss of trust than ever before. The survey provides the global benchmark on the state of ethics and compliance in businesses across the globe, including 991 respondents in Australia.

There were six key findings from the 2023 survey.

Key finding one: Employees continue to face exceptionally high levels of pressure to compromise workplace standards or the law, with 29 percent of employees experiencing such pressures.

Key finding two: Workplace misconduct is at an all-time high, with almost two-thirds of employees observing at least one act that they deemed to be a violation of their organisation’s standards or the law over the previous 12 months (figure one).

Key finding three: Globally, reporting of observed misconduct is at a record high, with 72 percent of employees who observed misconduct reporting their observation; this is a positive increase on previous years.

Key finding four: Retaliation against employees who report misconduct continues to occur at unacceptable rates.

Key finding five: An incredible 87 percent of employees indicated that their workplace does not have a strong ethical culture, which means that some or all of the following are absent:

• ethical conduct at all levels
• employee trust that leaders and supervisors will keep their commitments
• provision of information to keep employees informed
• accountability when wrongdoing occurs.

Key finding six: Businesses are not taking the steps that are proven to significantly reduce their risk. As business culture strengthens, employee conduct improves; organisations with strong cultures are 467 percent more likely to demonstrate a positive impact on employees than organisations with weak leaning cultures. This impact includes:

• employees’ recognising and adhering to organisational values
• feeling prepared to handle key risks
• reporting suspected wrongdoing
• reduced levels of misconduct overall.

A strong business culture has been shown to not only be linked to ethical practice, it also directly relates to business success. In the world of financial advice, a strong business culture will build trust with your clients and is more likely to result in a successful and profitable business.

Ethics and financial advice

Financial advisers play a crucial role in helping Australians achieve their financial goals. However, trust in the industry has been eroded over time thanks to a small number of individuals who perpetuate unethical practices.

The Financial Planners and Advisers Code of Ethics (Code) has strong ties with the overarching legislation that regulates the provision of financial advice. ASIC expects Australian Financial Services licensees to take a number of reasonable steps to ensure that their authorised representatives comply with both the law and the standards that comprise the Code (figure three). For example, licensees must:

• Ensure their authorised representatives are aware of the need for compliance with the Code and that this compliance is ongoing.
• Provide training and/or guidance to their authorised representatives about the types of conduct that is consistent with the code.
• Facilitate individual advisers’ ability to raise concerns with the AFS licensee about how the licensee’s systems and controls may be hindering their ability to comply with the code, and acting on those concerns where appropriate.
• Consider whether advisers are complying with the code as part of their regular, ongoing monitoring of adviser conduct.
• Make any necessary changes to systems and processes to ensure compliance with the Code and the Corporations Act 2001 that governs it.

Building a positive business culture

Building a positive business culture is essential for the success of any organisation, regardless of the industry in which it operates. Such a culture fosters an environment where employees feel esteemed, respected and driven to excel in their roles. Consequently, this cultivates heightened productivity, bolsters employee retention rates and enhances overall performance. Particularly in realms where ethical integrity is paramount, a positive business culture acts as a bedrock supporting ethical endeavours.

Constructing a positive business culture hinges on several components. These encompass a firm grasp of purpose and values, proficient communication, acknowledgment and incentives and avenues for staff growth and enrichment.

Central to a positive business culture is a resolute grasp of purpose and values. A business must articulate a distinct mission and value system, disseminating these principles among its workforce and integrating them into daily operations. Employees who grasp the raison d’être and values of their company are inclined to feel a deeper connection to their work, exhibit heightened motivation to contribute to the organisation’s success and importantly, to embrace ethical conduct.

Effective communication is an essential component of a positive business culture. You need to ensure there is open and transparent communication between employees and management, as well as among employees themselves. When communication is clear and consistent, employees feel more informed and engaged in the work that they are doing. They also feel more comfortable speaking up and sharing their ideas and concerns with their colleagues and superiors. This is particularly important in relation to ethics – employees need to be comfortable asking questions, questioning decisions or recommendations or seek support in dealing with an ethical conundrum.

Recognition and rewards can be utilised to build a positive business culture. Employees who feel recognised and appreciated for their contributions are more likely to feel motivated and engaged in their work. Finally, opportunities for growth and development are crucial for building a positive business culture. This means providing your team with opportunities to learn new skills, take on new responsibilities and advance within the organisation.

An ethics centric practice

It’s important to note that the approach to an ethics centred advice practice should not start and stop with the adviser. In fact, it extends from the receptionist who may greet clients, the administrator who handles their paperwork, through to the adviser who meets with clients and develops an appropriate financial planning strategy.

It also includes others, such as paraplanners who implement investment decisions, or practice managers who develop staff training. All staff members need to understand how the Code of Ethics impacts their role in the practice and how they can best perform their role to meet their obligations and support the advisers and licensees to meet theirs. After all, it’s the licensee and adviser who carry the responsibility (and potential enforcement action) of a breach.

There are a number of strategies that can be implemented to create an ethics-centric practice that can help mitigate the risk of breaching the Code.

1. Define and communicate your company’s mission and values: This should be a clear and concise statement that outlines the purpose of your business and the values that guide it. This is your chance to ensure ethical practice forms a key part of your mission and values.

Values could include ‘Always put the client’s best interests first’ or ‘We help our clients attain their financial and life objectives by situating their interests front and centre.’

2. Code of conduct: a practice-wide code of conduct, one which encapsulates your business’s values as well as the Code of Ethics, should provide your team with a clear understanding of their role and set clear expectations about employee behaviour when performing that role. It should also detail how, in an ethics-centric practice, each of the Code’s twelve standards may specifically intersect their role.
3. Checklist: a checklist can be used to safeguard compliance with the Code. The questions in the checklist should be tailored to each role and include those relevant to dealing with prospective, new and existing clients.
4. Client communication: It’s really important be transparent in your communications to foster openness and trust. Establish ongoing channels of communication and explain how you will communicate with them; it’s important to detail the method and frequency.

Remember that it’s important not to make promises you know you cannot (or may not be able to) keep. As well as potentially being a breach of the Code, it will reflect badly on your practice.

5. Foster open and transparent intra-practice communication: This can be achieved through regular team meetings, one-on-one check-ins with employees, and other communication tools. Encourage team members to discuss issues that could potentially breach the ethical standards in the Code.
6. Set key performance indicators (KPI): by reinforcing your company’s values, adhering to your practice’s code of conduct and behaving in a way that makes ethical behaviour central to their work will create an ethical practice. Although a values driven KPI may sometimes be more challenging to quantify than one with specific and measurable outcomes, it will highlight the importance of your company’s values and ethical practice to your business.
7. Workplace training: essential to make sure all staff understand both your values and the obligations of the Code. You can use workshops to promote ethics in your workplace, which will reinforce the practice’s standards of conduct and clarify behaviours and practices that do and don’t work within your own code of conduct – and within the Code.

Importantly, ethics training should not be a once off and, as far as possible, should be practical. Training should teach team members to make good decisions that are compliant with the law (including the Code) and consistent with your practice’s values.

Ethics training could be incorporated as part of a regular team meeting; for example, by using case studies that address common ethical dilemmas across the financial planning industry. Cases could be drawn from the AFCA data base and discussed – how would your practice have dealt with situation that arise? You can also encourage team members to discuss issues arising with their clients, or something within your organisation’s processes or technology that might lead to a breach of the Code.

8. Feedback loop: feedback is important. By encouraging staff to provide honest feedback about processes, conversations and client interactions, you are better placed to make sure you’re aware of issues that may arise that could potentially compromise your business. A feedback loop can help you identify gaps in relation to processes and procedures, and where a checklist or workplace training may ensure your business is not exposed.
9. Lead by example: irrespective of your position in a practice, it’s important to set a good example. For those who are senior in the practice, it’s more important to demonstrate acceptable behaviour. Senior advisers and personnel will set the tone for ethics in the practice; as such, they need to demonstrate the Code in their words and actions.
10. Hire the right people: when hiring new employees, it is important to consider whether they share the same values as your business. Consider including some ethics-based questions into your interview; this could include client scenarios to see what actions your prospective employee would take.

Having the right people in your business will help ensure that all team members are working towards the same goals, that there is a strong sense of cohesion within the team and that your clients are prioritised.

11. Regular audit: These or similar strategies may have already been implemented in your practice. If so, it’s important to review the effectiveness of each. What’s working well and what’s not? If you can identify gaps in processes that may lead to a breach of the Code, it’s better to identify them ahead of time than when ASIC comes knocking on your door.
12. Encourage work-life balance: Employees who feel that they have a good work-life balance are more likely to be happy and productive in their work. A happy team member is more likely to be aligned with your values and work hard to support your business and its most important asset – your clients.

Building an ethical and positive business culture takes time, effort and a commitment from everyone in your business. However, the benefits of a positive culture are clear, and it will stand your practice in good stead to build a successful, ethical business.

Case studies

The following case studies are based on real events; however, the names of people and organisations have been changed, and some details altered. The case studies have been drawn from the Australian Financial Complaints Authority (AFCA) or ASIC. For each, potential breaches of the Code of Ethics are identified.

These case studies are representative of those that could be used as part of workplace training. An example of what the adviser did or did not do, why the client complained (or ASIC investigated) and the outcome. How would your team members have dealt with the situation? What would they do if they saw a colleague conducting themselves in a similar way? What are your business’s processes and procedures in such an event?

Case study one

Sharon and Greg obtained advice from Paul, an authorised representative of the financial firm ACME Financial Planning. Sharon had received an inheritance of $165,000 and wanted to invest it to pay for her young children’s secondary school fees at a private school.

Paul’s advice was to invest the total amount into a property focused single managed investment scheme that was promoted as tax effective. The scheme entered into liquidation three years later and was wound up, with no return to investors.

Sharon and Greg made a complaint to AFCA. They said Paul’s advice was inappropriate as it did not match their balanced risk profile and there was no diversification in the overall strategy provided by Paul.

ACME Financial Planning claimed the advice was appropriate given the information available to Paul at the time.

Key findings from AFCA:

• Risk profiling found the complainants to be ‘balanced’ investors; consequently, the growth focused property managed investment scheme was not an appropriate investment.
• The overall strategy lacked critical diversification because it was heavily overweight towards a single investment.
• While it may have been appropriate for a balanced, growth or high growth investor to have some exposure to the managed investment scheme, the complainants were heavily overweight to this one financial product with minimal basis for this being appropriate for their needs and objectives.
• There were no discussions about other options for diversification.

The determination was made in favour of the complainants. The outcome was that within 28 days of Sharon and Greg accepting the determination, ACME Financial Planning was to pay the complainants $165,000 plus interest.

Paul potentially breached the following standards of the Code of Ethics.

Case study two

Sydney-based adviser Edward recently received a permanent ban from providing any financial services, performing any function involved in the carrying on of a financial services business or controlling an entity that carries on a financial services business. Edward had appealed the decision to the Administrative Appeals Tribunal, but ASIC’s original ban was upheld.

Edward provided insurance advice within a broader advice practice. However, ASIC found that over a six-month period, he had gambled away over $400,000 that had been paid to him in respect of his clients’ insurance premiums. ASIC described his fraud as ‘unsophisticated’ and one that was easily uncovered.

ASIC noted that financial advisers must act with honesty and integrity in their dealings with clients. The regulatory body may ban a financial adviser if it has reason to believe that they are not a fit and proper person to provide financial services or that they are likely to contravene a financial services law.

Edward’s actions not only resulted in serious action against him, it’s likely they reflected poorly on the advice practice in which he worked. He potentially breached the following standards in the Code.

Case study three

Judy met with financial adviser Jim from ACME Advisers at a breakfast meeting. He was talking to her about an exciting IPO available only to sophisticated investors. Judy is a sophisticated investor and holds the required accountant’s certificate. During the breakfast meeting, Jim spoke at length about a new medicinal cannabis company that he was helping to float. He said that he was ‘very close’ to the company and its directors and spoke very positively about the company and mentioned that it was planning to list on the ASX.

Jim recommended that Judy take-up shares in a pre-IPO offering that was in progress. No documentation, offer documents or information memoranda were provided at the meeting, but the adviser said that if they were interested in investing, he would pass their details on to the company, which would contact the investors to make the necessary arrangements direct. Judy invested $50,000 for her SMSF. The company failed to list and early investments were lost.

She made a complaint to AFCA to claim the return of her investment of $50,000. AFCA investigated to determine whether:

• Jim provided her with financial product advice
• the advice was misleading and deceptive
• ACME Advice is responsible for Jim’s conduct.

ACME Advice says that since Judy was never a client of the firm, and there is no evidence that she received advice from the firm, it is not responsible for any loss that she suffered. It also states that it had no role in the IPO.

AFCA found that under the Corporations Act 2001, Jim provided financial product advice to the complainant, which is a financial service and, under the Act, ACME Advice was responsible for Jim’s actions in giving advice to the complainant. Despite that, AFCA found that the advice was not misleading or deceptive because it was based on the information available to the adviser at the time.

AFCA also stated that had the company listed, it may well have provided the opportunity for profits to early investors like Judy. Therefore, AFCA determined that it would not be fair to require ACME Advice to now compensate the complainant.

It is an interesting case study for discussion. Although AFCA found in favour of the adviser and ACME Advice, giving financial product advice in a social setting is quite a grey area. While Jim did not break the law or overtly breach the Code, there may be a few standards where his behaviour trod a fine line.

Case study four: Poor business culture results in failure by licensee

Following several client complaints, ASIC commenced an investigation into adviser Adele. ASIC found she had had breached her best interests obligations by giving inappropriate advice and failing to put her clients’ interests first. At the time, Adele was an authorised representative of ACME Financial Advice.

When Adele’s case went to the Federal Court, it was found that ACME Financial Advice failed to take reasonable steps to ensure that Adele provided appropriate advice to clients, acted in the clients’ best interests and put the clients’ interests ahead of her own.

Further, the Court found ACME Financial Advice did not have a strong business culture. Processes to monitor the advice given by advisers was inadequate, and the group failed to identify when their authorised representatives were avoiding advice quality checks or recommending non-approved financial products.

Commenting on the case, ASIC Deputy Chair Sarah Court said, ‘Financial advice licensees need to understand that they can be liable if their advisers do not act in the best interests of their clients and do not prioritise their clients’ interests over their own.’

In this case, the licensee ACME Financial Advice potentially breached the following standards:

In the dynamic landscape of financial services, where trust is the cornerstone of every successful client-adviser relationship, a robust business culture is important. A business culture that prioritises ethics not only safeguards the interests of clients but also fortifies the reputation and longevity of the practice itself. As explored throughout this article, the ethos of an organisation permeates every facet of its operations, influencing the decisions made by advisers, the standards upheld in client interactions and the overall integrity of the services rendered.

In the realm of financial advice, where the stakes are high and the consequences of unethical conduct can be profound, cultivating a culture of integrity is imperative. By instilling ethical principles into the practice, advice firms can mitigate the risks of misconduct and inspire confidence among clients.

A strong business culture can serve as a compass. It can help navigate all staff through the complexities of ethical dilemmas and ensure that they consistently act in the best interests of clients. This alignment of values fosters a sense of accountability and responsibility. By investing in the development of a strong business culture, financial advice firms not only fulfill their moral obligations to clients but also lay the groundwork for sustainable success in an industry where trust is the most valuable currency of all.

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Notes:
[1] https://www.theage.com.au/business/the-economy/productivity-isn-t-working-so-why-not-try-being-more-ethical-20240505-p5fp05.html